504 Rate Update

504 May 2016 Rates

4.194% – 10 Year Debenture Effective Rate *

4.320% – 20 Year Debenture Effective Rate *

Pascal’s Wager & Interest Rates

Another month, another round in the debate between “lower for longer” or a “spike is in the offing” as regards long term interest rates. The “lower for longer” school cites an economy, if not suffering from malaise, then at best blasé. The “spike” school cites signs of a labor market edging toward wage growth, and thus incipient inflationary pressures.

Meanwhile, rates remain relatively static.

Chart and Statistical Data is from May 2006 to May 2016

Debenture Rate

10 Year T-Note

Spread Over T-Note

May 2016

2.27%

1.79%

0.48%

Mean

3.76%

2.93%

0.82%

Median

3.38%

2.72%

0.65%

STDev

0.012433153

0.009545789

0.005705795

Blaise Pascal, the 17th century French mathematician and philosopher had a profoundly rational approach to theology. In what has been dubbed as “Pascal’s Wager”, he argued for belief in the Divine, based on a rationalist view of the possible outcomes. If there was no Higher Power defining a moral code, then the consequence of belief was merely forgone and finite pleasures. However, if said Higher Power did exist, the consequences of unbelief were both eternal and highly unpleasant.

While we await the resolution of the “lower for longer” vs. “spike” debate, by that secular Higher Power, The Bond Market, the same logic can be applied to long term interest rates. The premium to lock in a low fixed rate is a small price to pay for long term peace of mind, for both borrower and lender. 504 offers the opportunity to achieve below market long term rates, and in that context “lower for longer” is clearly the winning wager.